“Tesla’s cars are effectively consumer electronics, albeit expensive ones, that reduce our dependence on oil.”
That’s a big summarizing statement from the case made by Loup Venture’s Gene Munster, Doug Clinton and Andrew Murphy that Tesla, with a $50-billion current market cap, is destined to become the next Apple (market cap: $770 billion.)
Munster was a noted Apple analyst when he was ensconced at Piper Jaffray, and he’s now out on his own with a venture fund. Thematically, he’s looking for another Apple, and Tesla is clearly it.
Tesla combines all the elements that Apple enthusiasts love to tout about the tech giant: visionary leader (Elon Musk and Steve Jobs), cultlike following, sexy products, a walled-garden approach the user experience. It has for some time, and certainly since Jobs’ death, been extremely tempting to slot Musk into a role as the next Steve, and to promote Tesla as the latest high-tech, big-growth company.
Conveniently overlooked in this analysis is Tesla’s inability to make money; its difficulties achieving its production and deliveries targets; the meager global market for electric vehicles; and most critically the fact that Tesla is effectively not a consumer electronics company, but rather an auto manufacturer.
Not a tech company
This distinction between Tesla-the-carmaker and Tesla-the-Silicon-Valley-tech darling is nothing new. It’s actually becoming progressively more evident as Tesla produces more vehicles and heads toward the introduction of its mass-market Model 3 later this year.
But Munster and his colleagues can’t resist the Apple-Tesla analogy, no matter how tenuous it is. To support their case, they offer five key similarities between the companies: brand; visionary leadership; integrated hardware and software; halo effect; reshaping a market.
Munster believes that Tesla’s high-satisfaction rate thus far among owners means that Tesla matches Apple on that brand-love front. But with Apple, we’re talking about a huge chunk of the market just for iPhones (beyond Apple’s other products); with Tesla, we’re dealing with a sliver of car owners.
Musk is certainly a visionary leader. In fact, he’s much more visionary than Jobs. And that could be a problem — Jobs wasn’t out to save the Earth or colonize Mars. His driving ambition was basically to make people happy.
As far as integrated hardware and software goes, Munster thinks that because Tesla does just about everything itself, it has “a multi-year head start over other automakers in terms of features like over-the-air updates and autonomous driving.”
But that’s bogus because most other major automakers could commence OTR updates tomorrow if they wanted, but they’re unsure if it makes sense for consumers. In terms of autonomous driving, Tesla has been running its system for several years, but the owner base is still tiny, and the technology is distinctive, favoring cameras and sensors rather than more expensive laser-radar tech.
As a result, it’s entirely possible that Tesla’s tech could top out and be quickly surpassed by a GM or a Ford. Besides, although software is a key piece of every Tesla vehicle, it isn’t Tesla’s core product: a metal rectangle with four wheels, a battery, and one or two electric motors.
Tesla is headed in the wrong direction
What about “halo effect?” The argument is that “[w]ith the Model 3 starting at $35,000, a large audience of entry level luxury car owners are going to experience Tesla for the first time, and at 91% satisfaction, they will likely be happy to join the club.”
First off, it’s unsure whether they’ll be 91% satisfied with a much cheaper Tesla — so far, the company has played in the higher reaches of the luxury realm.
Second, Tesla is about to undermine its quite attractive gross margins of around 20% (that’s what it says it gets on the Model S and Model X, it two current vehicles). The Model 3 will be priced at roughly half as much (two-thirds as much if there’s ever a barebones entry level car), so that gross margin won’t hold if Tesla can’t build the Model 3 for half as much as the S and X.
This is a common situation in the auto industry. Smaller, cheaper cars make less money than big trucks and SUVs. Thanks to Musk’s vision of freeing humanity from fossil fuels, Tesla is willing to overlook this. The objective has to be getting as many electric cars on the road as possible.
Munster spins some more gold around Tesla’s energy storage and solar business, both of which add effectively nothing to the company’s valuation while distracting its management and adding debt to the balance sheet. The idea is that Tesla is a conglomerate that’s creating a platform for sustainable energy.
What’s fascinating and alarming here is Munster’s — and for that matter, a lot of Tesla bulls’ — fixation with talking about the company as anything but at base a carmaker.
This is obviously because it’s awkward to justify a $50-billion valuation for a car company that can barely make 80,000 vehicles a year when its less valuable competitors — Ford, Fiat Chrysler Automobiles, at times GM — can make and profitably sell 80,000 of a single pickup truck model in a month.
History repeats itself
Wall Street went through something similar in 2015-2016, when analysts collectively figured out that Tesla needed to manufacture millions of vehicles to justify what was then considered a lofty $30-billion market cap. Tesla had been scrutinized as a stock, unhinged from manufacturing fundamentals (the biggest of which is that no major automaker is still vertically integrated, but instead uses “just in time” lean manufacturing methods). A more intense focus on its production and sales caused Wall Street to (sort of) see the light.
With the 15-year-old company adding $20 billion in stock value in just four months, a new set of fantastic justifications are required. Enter the revived notion that Tesla should be valued by tech metrics, rather than dragged down by the mundane blocking-and-tackling concerns that are successfully managed by every far less valuable global automaker.
What’s impressive, really, is that Munster (and Clinton and Murphy) would even go there. It’s understandable: there are Tesla bulls and there are folks who think that Tesla will change everything, not unlike how Apple altered the lives of many with the iPhone. But if you know anything about the car business, you’ll realize that Munster’s “Tesla is the new Apple” position is a good story that has almost no connection to reality.
This column does not necessarily reflect the opinion of Business Insider.
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